China’s status as a “market economy” is once again under dispute. Not, of course, by anyone who knows anything about the Chinese economy, but within the councils of the WTO, where the issue is being argued between the European Union and China. The U.S. Trade Representative Robert Lighthizer has notified the body that the U.S. also — in support of the EU’s case — opposes China’s recognition as a market economy.
China has reacted with predictable hostility, restating its longstanding view that market economy status would simply become a fact on the 15th anniversary of joining the WTO, almost exactly a year ago, when China first filed a complaint at the WTO about the refusal of the U.S. and the EU to grant this recognition. According to a strict reading of their accession treaty, they have at least an argument. In this agreement, a 15-year period was assumed to be enough time for China to implement its many provisions and emerge, more or less, as a functioning market economy. Had China made faster progress, they could have made their case and been granted this status earlier, according to the agreement.
Many countries have, in fact, recognized China as a market economy: Singapore back in 2004, Australia in 2005, Brazil in 2004 (although Reuters reveals the picture is far more complex, with Brazil applying extensive anti-dumping measures but not wishing to harm relations by getting involved in the public dispute). But in each case, no effort was made to demonstrate that China was a market economy, as stipulated in the accession agreement. Instead it was usually appended to a Free Trade Agreement and made a condition of access to China’s market for foreign exporters.
The ‘Super Markets’
Nevertheless, success in strong-arming smaller economies and exporters to recognize China as a market economy cuts no ice with the EU or the U.S. They remain implacably opposed for the simple reason that this would restrict anti-dumping measures against China’s vast export surplus. Equally, China has made no inroads in persuading either the U.S. or the EU that it is, in fact, a market economy, doing almost nothing to ensure EU or U.S. companies actually gain market access to China without endless conditions and habitual delays. Specifically, China continually promises open market access for EU and U.S. exporters, but then frustrates them in practice, demands investment takes place through joint ventures, often with SOEs, and routinely insists upon technology transfer.
Ironically, all of these restrictive practices are forbidden in the same accession agreement upon which China relies in its case for market economy status in the first place. But because the WTO’s enforcement procedures are not strong enough to enforce them all, the issues are continually raised as future concessions, when they are simply 16 years overdue.
For many years the lure of market access to China has been enough for foreign exporters to soft-peddle their demands, and the recent U.S. action to “self-initiate” an anti-dumping action over aluminium is an indicator that supply chains are complex enough for individual companies to fear retaliation. But there is no mistaking that the slow, cross sectoral and inter-departmental ratchet of U.S. pressure is rising on China trade. Even the new National Security Strategy is said to make much stronger linkages between political and economic questions than in the past, with a particular focus on China.
Is the WTO threatened?
Since Davos in January, where Xi Jinping was hailed as a new defender of free trade, much hyperbole has bypassed the reality of China’s actual trade policy and practice and instead focussed on U.S. retreat. But Robert Lighthizer’s recent remarks clearly indicate that U.S. patience is running thin with the WTO as a arbitrator of trade disputes, suggesting that the U.S. will start to draw upon an arsenal of dormant unilateral powers that may undermine the centrality of the WTO to world trade. This may or may not be understood as a retreat from free trade, but it is obviously inspired by a frustration with the inability of a rules-based system to enforce the rules it is based on. In other words, while the WTO won’t disappear, it does risk being sidelined.
Recognizing China as a market based economy then, has become a real dispute with an extra helping of symbolism. Not only is it about China’s ability to resist anti-dumping measures, but also whether a serious international organization, dedicated to the serious business of trade, can withstand its central provisions becoming mere polite fictions. So when Lighthizer says that a decision to recognize China as a market economy “would be cataclysmic for the WTO,” it might be worth taking him seriously.
Moreover, if joining the WTO was the spur to Chinese economic development that most economists claim it was, policy makers in Beijing might want to conduct an impact assessment on the risk of it all falling apart.